Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/179346 
Year of Publication: 
2018
Series/Report no.: 
ECB Working Paper No. 2131
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
We assess the ability of yield curve factors to predict risk premia in short-term interest rates and exchange rates across a large sample of major advanced economies. We find that the same tick-shaped linear combination of (relative) bond yields predicts risk premia in both short-term interest rates and exchange rates at returnforecasting horizons of up to six months for all (but one) countries and currencies in our sample. Our single forecasting factor loads positively on the short and long end of the curve and negatively on the medium-term and is therefore inversely related to Nelson-Siegel's curvature factor. In line with recent interpretations of the yield curve factors, our findings suggest that the hump of the yield curve bears important information about future short-term interest rates. A relatively high curvature predicts a surprise rise in short-term interest rates beyond expectations and, coincidentally, an appreciation of the home currency in line with uncovered interest rate parity.
Subjects: 
Exchange rates
Interest rates
Risk premia
Yield curve
Predictability
JEL: 
C23
C53
G11
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-3236-3
Document Type: 
Working Paper

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